CFPB's Recent Rule Shows Everything That's Wrong With Washington

The Consumer Financial Protection Bureau earlier this month finalized a rule forbidding financial services firms from including mandatory arbitration clauses in contracts with consumers. The rule is both bad for consumers and illustrative of the need for accountability in Washington, where unelected bureaucrats wield too much power with too little oversight.

Created by 2010's Dodd-Frank Act, the CFPB is not only an independent agency but is essentially accountable to no one. Former President Barack Obama's choice for CFPB director — Richard Cordray, the former Ohio attorney general — remains in the post because the law requires that he is removable by the president only "for cause." It happens that a panel of the D.C. Circuit struck down that arrangement last year as unconstitutional, but the case currently is on appeal to the full circuit.

It isn't just the White House that faces limits in changing the agency's direction. The CFPB operates wholly outside the normal congressional appropriations process, and is instead funded by money transferred from the Federal Reserve. This prevents Congress from using its constitutional power of the purse to exercise oversight over the agency, which the D.C. Circuit called "extra icing on an unconstitutional cake already frosted."

In promulgating the arbitration clause rule, the CFPB is using the tremendous lawmaking powers delegated to it under Dodd-Frank to take the side of the plaintiffs' bar, who claim that allowing consumer contracts to call for arbitration, rather than litigation, to resolve disputes serves to deny consumers their "day in court." While mandatory arbitration clauses do indeed curb litigation, the actual process of arbitration is far from the rigged system its motivated critics portray.

A 2009 study by the Searle Civil Justice Institute found consumers actually are more likely to be awarded relief in arbitration than in court. While supporters of the rule contend that arbitration is rigged against consumers, a look at the CFPB's own study in support of its rule found that 87% of class action lawsuits resulted in zero benefits to the plaintiffs.

Even when consumers are lucky enough to be part of a successful class action, the average individual payment is only about $32. Interestingly, the lawyers in such suits raked in $425 million in fees between 2010 and 2013, according to Forbes' Daniel Fisher. Of the arbitrations reviewed by the CFPB in which consumers were victorious, the average individual payment was $5,389.

To be sure, not all customers follow through to arbitration. But no individual customer with a $5,000 claim can get a lawyer to press his case. And arbitration is merely a backstop since sellers of financial products already have a strong incentive to refund wrongfully imposed fees when they receive a customer complaint.

A Mercatus Center study reviewed evidence from one bank that, in 2014, "offered refunds in about 68% of cases in which a consumer complained, resulting in refunds of over $2.275 million." The evidentiary record in AT&T v. Concepcion, a 2010 Supreme Court ruling which supported enforcement of mandatory arbitration clauses, found that the company in that case responded to consumer complaints by refunding more than $1.3 billion in a single year.

Anti-arbitration activists often respond to this hard evidence by arguing that class-action lawsuits are more likely to result in broad changes to corporate behavior than individual dispute resolution. While this may be true, we traditionally have deferred to the political process, not litigation by profit-seeking plaintiffs' attorneys, as the proper way to decide how best to regulate corporate conduct.

In this case, companies will doubtless respond to the CFPB rule by changing their practices and eliminating generous arbitration provisions, since they cannot stop expensive class-action lawsuits. But this is hardly a boon for consumers. A 2016 Manhattan Institute study found that the CFPB's arbitration rule would likely result in higher upfront fees and minimum balance requirements being imposed on the very consumers the agency purports to be helping — a result that already appears to have come to pass.

Despite creating an unaccountable entity in the CFPB and vesting it with lawmaking powers, Congress still has the tools to fix this problem. Under the Congressional Review Act, Congress can repeal any agency action within the last 60 legislative days under an expedited process that avoids the Senate filibuster. This arbitration rule would seem to be an obvious candidate for CRA repeal, but concerns are arising that Congress is so overwhelmed with health care and other legislative priorities that it might not have the floor time to do so.

Unfortunately, the CFPB arbitration episode is not a one-off problem. Over the past century, Congress has delegated more and more of its power to unaccountable agencies, while also failing to exercise proper oversight. Congress has lacked both the capacity and the will to reassert its role as the country's first branch. Until it does, situations like this could just be the tip of the iceberg.

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